A lot of people hear “S corp saves taxes” and rush to file the election. Sometimes it helps. Sometimes it adds payroll, compliance, and tax prep costs with little to no benefit.

Here is when it usually does save money.

The S corp sweet spot

An S corp can reduce self employment tax on part of your business profit, but only when:

• You have consistent net profit after expenses
• You can pay yourself a reasonable salary
• The business will still have profit left after that salary
• You are ready to run payroll and keep clean books

Green light indicators

You are a strong candidate when most of these are true:

• Net profit is trending consistently month to month
• Net profit is generally more than your reasonable wage
• You plan to stay in business at least 12 to 24 months
• You already separate business and personal finances
• Your bookkeeping is clean enough to support payroll and a business return

When it does NOT save you money

An S corp often is not worth it when:

• Your profit is low or inconsistent
• You are still mixing personal and business expenses
• You plan to take money out randomly with no payroll plan
• You are mainly passive income such as rentals
• You cannot support the extra costs of payroll and tax filings

Simple example

If your LLC nets $80,000:

• If a reasonable salary is $55,000
• The remaining $25,000 may avoid self employment tax
  That can create real savings, but only after factoring payroll and compliance costs.

What you need to decide correctly

• Last year tax return, if available
• Year to date profit and loss
• Your role in the business and what a reasonable wage would be
• How you currently pay yourself
• Expected profit for the next 12 months

If you want this evaluated the right way, with clean numbers and a conservative recommendation, book your tax preparation or strategy time here:
Calendly – CATHERINE KIHIU